Measurement and Analysis of the Evolution of Institutions in Nigeria David O. Fadiran, Mare Sarr, Johannes W. Fedderke ERSA working paper 665 February 2017 Economic Research Southern Africa (ERSA) is a research programme funded by the National Treasury of South Africa. The views expressed are those of the author(s) and do not necessarily represent those of the funder, ERSA or the author’s affiliated institution(s). ERSA shall not be liable to any person for inaccurate information or opinions contained herein. Measurement and Analysis of the Evolution of Institutions in Nigeria∗ David O. Fadiran† Mare Sarr‡ Johannes W. Fedderke§ 7th November 2016 Abstract “Institutions matter” has become a generally accepted premise in development economics. The growth and development problems in Nigeria are also common knowledge. To better understand these problems a proper characterization of institutions in Nigeria is essential. Conducting empirical test of the role of institutions in Nigeria’s growth and development can prove challenging due to lack of institu- tional data set that span over a long time. In the event that short span data set is available, Glaeser et al. (2004) highlight the many flaws implicit in such measures constructed by political scientists in literature. In this paper, we construct an index of institution quality for the period 1862 through to 2011 for Nigeria, in doing so, we adopt a new method of measuring institutions, which makes use of pre-existing (de jure) legislations, ordinances and constitutions in constructing three institutional indicators; civil and polit- ical liberties, freehold property rights, and non-freehold(customary) property rights. These constructed indicators provide a platform for characterization and comprehensive analysis of how institutions have evolved in Nigeria. Keywords: Institutions, Legislations, persistence, Economic Growth and Development JEL Classification: K00, K11, N00, N1, N47, O1, O11 1 Introduction In the 1950s and early 1960s, independence from colonialism infused a great deal of optimism that new self-governing African governments would be able to use newly acquired political freedoms to enhance the ∗The authors gratefully acknowledge comments from participants at the First Annual Meeting of the Political Scientists in South Africa, sponsored by Economic Research South Africa (ERSA) in Johannesburg, South Africa. We would also like to thank Lynn Woolfrey for editorial comments, and Prof. Dejo Olowu for reviewing the datasets and providing clarity and corrections where necessary. Finally, David Fadiran gratefully acknowledges financial support from the Carnegie Corporation. †Department of Economics, University of South Africa, Hazelwood, 0044, South Africa. Email: [email protected] ‡School of Economics, University of Cape Town, Private Bag, Rondebosch 7701, South Africa. Email: [email protected] §School of International Affairs, Pennsylvania State University, and Economic Research Southern Africa (ERSA). Email: [email protected] 1 welfare of citizens and hence accelerate development. That through expanded provision of socio-economic services related to health, education and basic infrastructure, African countries (Nigeria included) could finally attain self-governance as well as economic development. In the initial stages of decolonisation, much of this optimism was fuelled by economic prospects and welfare indicators that either exceeded or compared positively with those in many countries of the developing (or third) world. Supported by favourable factors that included rising commodity prices, growing industrialisation and accelerated investment, Africa was enjoying moderate growth during this period (1960s to late 1970s). However, the positive prospects of Nigeria (and many African countries) was halted by the notable stag- nation across the continent in the late 1970s and 1980s. This severely dented the expectations that Nigeria would use its strong natural resource base to sustain the initial post-independence growth levels. This was however not the case. Weak institutions (among others) have been argued to be root cause of conflict, polit- ical capture, dictatorships, and other phenomena that have undermined the expected process of economic development in Nigeria and many African Countries (Acemoglu et al., 2005; Acemoglu, 2006; Acemoglu and Robinson, 006b). It is therefore expedient that the role of institutions as a key determinant of economic performance be well examined. The main obstacles to achieving this is the lack of a consensus on what a measure of institutions should entail, and furthermore, the limited time period for which the existing em- pirical institutional indicator are available. Agencies such as Political Risk Services, the World Bank, and Polity IV, have constructed indicators for institutions in African countries. However, the methodology em- ployed in most of these, have been criticised (Bollen, 1980, 1990; Glaeser et al., 2004; Voigt, 2013), while the period covered have been too short for long-run analysis (Kaufmann et al., 2009; Gwenhamo et al., 2012). Nigeria presents an interesting case study due to its vast natural resources wealth and yet uninspiring de- velopment since the mid 1970’s. The economic environment worsened with the general fall in commodity prices and the subsequent fall in world crude oil prices in the late 1970’s. Growth of Per capita Gross Domestic production (GDP) has averaged 4.17% per year over the past 54 years. This number is however boosted by the past 15 years, the average growth rate was 2.76% for the years post-independence until 1999 (Group, 2012). Between 1970 and 2000, the percentage of the population living on less than $1 a day went from 36% to a relatively high 70%, while during the same period, Nigeria obtained approximately $250 billion in oil revenues (not including foreign payments), this amounts to about $245 for each Nigerian cit- izen, but the per capita GDP has remained around the same value for the past 40 years; $1113 in 1970 and $1084 in 2000 (Sala-i Martin and Subramanian, 2003). There has been negative performance in just about all sectors of the economy over the past two decades, except for the financial sector, which has seen some drastic institutional reforms over the past decade. The above characteristics make Nigeria an interesting case study. From an institutional perspective, the establishment of institutions and institutional practices in Nigeria that foster development may have been stymied by the myriad socio-political changes in the country since the entrance of the British in 1822. In addition to this, Nigeria has gone through numerous regime changes and disturbances before and after independence, changes from military to civilian rule, and ethnic and tribal conflicts. In addition, Nigeria has seen six coups d’état since independence. All these occurred between 2 independence in 1960 and the late 1980s. It is therefore not surprising that it was during this same period that Nigeria, like many independent African states, began to exhibit institutional limitations reflected in dysfunctional political institutions, “bad governance”, as well as wide spread corruption in the the polity (Calamitsis et al., 1999; Alence, 2004). In turn, these have contributed to a breakdown in social cohesion, resulting in episodic outbursts of ethnic conflict and political instability that severely hindered economic growth and development. Based of this, an analysis of both the economic and political institutions in Nigeria will be conducted. A prevailing issue in such studies has been the short period for which institutional indicators have been con- structed. Long-time series dataset capturing the quality of both political and economic institutions, is not only advantageous for long-run empirical dynamics, but it also provides an avenue to explore historical pro- cesses that may evolve in tandem with institutions in Nigeria (Khan, 2012). In this paper,we investigate the evolution of both political and economic institutions as key determinants of Nigeria’s economic perform- ance. To achieve this, we make use of historical data, de jure legislation, ordinances and Constitutions in constructing indicators of political and economic institutions for Nigeria. This approach will help in avoid- ing some of the conceptual flaws found in previous measures (Glaeser et al., 2004). The indices will span the period 1862 to 2011, providing a long-run time series data, which will facilitate empirical testing of long-run dynamics of institutional change in Nigeria, and its effect of economic performance. The indices to be constructed will be de jure based civil and political liberties, freehold property rights and non-freehold property rights. This follows similar frameworks used by studies carried out by Fedderke et al. (2001) and Gwenhamo et al.(2008). 1 The remainder of this paper is organised as follows. In the next section,we present the literature review. Sections3 and4 present the methodology and results. The final section presents the conclusion and possible way forward for this area of research. 2 Background on Institutions Attention has long been given to institutions and the conceptualisation the role they play in the path to- wards economic development. The initial idea was not so much on institutions as a whole, but rather on democracy and governance, and how these change together with the transformation of a country’s economy (Coase, 1960; North and Thomas, 1973; Bollen, 1980; Huntington, 1984). While most of the